America Invents Act Not Enough? – More Patent Reform on the National Radar

Guest Commentary

The America Invents Act (“AIA”) of 2011 (N1) contained the most sweeping changes to U.S. patent law in decades. Among the many changes were provisions designed to curb patent lawsuits filed by companies known as non-practicing entities (“NPEs”) or patent assertion entities (“PAE”) – or more pejoratively, patent trolls. Those provisions included limitations on the joinder of multiple defendants in patent infringement lawsuits and new provisions for U.S. Patent and Trademark Office (“PTO”) reexamination of certain classes of patents subject to litigation.

Now, barely two years later, a second major wave of patent reform appears on the horizon. This time, all three branches of the federal government, the International Trade Commission (“ITC”), and even one state attorney general have gotten into the act of trying to stamp out the worst of NPE lawsuits. Below we summarize key provisions of each of those initiatives.

Congress Takes a Second Stab at NPEs

Since February, five anti-NPE bills have been introduced in Congress. Of the pending bills, the most publicized and dramatic piece of legislation is the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act, which was introduced in 2012, (N2) died in subcommittee, and was reintroduced in February. The principal sponsors of the legislation are Rep. Peter DeFazio (D-OR) and Rep. Jason Chaffetz (R-UT). The SHIELD Act attempts to curb NPE lawsuits by permitting the prevailing party to recoup costs, including attorneys’ fees, if the lawsuit is filed without a reasonable likelihood of success. (N3) As a further deterrent, the party alleging infringement must post a bond to ensure the full recovery of costs. (N4) The Act specifically targets NPEs by allowing a party alleging infringement to avoid these provisions if the party is (1) the original inventor or assignee of the patent at issue; (2) practicing the patent “through production or sale of an item covered by the patent;” or (3) an institution of higher education or a technology transfer organization. (N5) The SHIELD Act is currently before the House Judiciary’s Subcommittee on Courts, Intellectual Property, and the Internet. Since its reintroduction earlier this year, the bill has also been co-sponsored by Rep. Peter Welch (D-VT), Rep. Tim Walberg (R-MI), and Rep. Kerry Bentivolio (R-MI).

The Patent Quality Improvement Act, introduced by Senator Charles Schumer (D-NY) in May, seeks to expand the provisions of the AIA that permits parties to challenge certain business method patents. The AIA implemented the “Transitional Program for Covered Business Method Patents” (“CBM Review”) (N6), which allows a party accused of infringing certain types of business method patents to challenge the patent at the USPTO and stay the pending litigation, but the program is currently limited to certain financial business method patents and will expire in 2020. The Patent Quality Improvement Act would eliminate the 2020 expiration date, (N7) and expand the scope of the program to include all business method patents, not just patents covering the administration of financial products or services. (N8) The bill is currently before the Senate Judiciary Committee.

In an effort to expose the oft-hidden identities of parties behind NPE suits, the End Anonymous Patents Act would require notice to the USPTO of any assignment or sale of patents within ninety days. (N9) The bill would further require applicants to disclose any real party-in-interest and name the owner of all newly issued, previously issued, and transferred patents. (N10) The bill was introduced by Rep. Ted Deutch (D-FL) in May and is also currently before the Subcommittee on Courts, Intellectual Property, and the Internet,

The Patent Abuse Reduction Act of 2013, introduced by Sen. John Cornyn (R-TX) in May, is similar to the SHIELD Act in that it includes fee shifting if the losing party’s position was not “objectively reasonable and substantially justified.” The bill goes further than the SHIELD ACT though, requiring the party alleging infringement to specify how each allegedly infringed claim corresponds to the functionality of the accused products. (N11) Further, the bill would require the complaint to identify any person with a direct financial interest in the outcome of the case, (N12) and shift discovery costs to the requesting party for any discovery beyond “information necessary for the court to determine the meaning of the terms used in the patent claim.” (N13) This legislation is also before the Senate Judiciary Committee.

The most recent piece of legislation is the Patent Litigation and Innovation Act, which was introduced by Rep. Blake Farenthold (R-TX) and Rep. Hakeem Jeffries (D-NY) on July 10, 2013. The sweeping bill includes the same heightened pleading requirements of the Patent Abuse Reduction Act. The bill further requires district courts to: (a) at the beginning of cases stay discovery until ruling on motions to dismiss or transfer or issuing a claim construction opinion to review, and (b) at the end of cases adjudicated on the merits, assess litigation conduct to determine whether to impose sanctions for any abusive litigation conduct.

Of these five bills, we believe that the Patent Quality Improvement Act ultimately stands the best chance of passage. The bill expands upon the CBM Review provisions of the AIA, which so far have been well received. Many observers initially believed that the SHIELD Act also stood a good chance at passage, but provisions that were added to the bill when it was reintroduced this year (including more aggressive fee-shifting provisions than originally proposed and bond posting requirements) have drawn criticism that may derail the bill. The fee-shifting provisions of the Patent Abuse Reduction Act may likewise doom that bill, although the heightened pleading requirements of that bill and the Patent Litigation and Innovation Act may be adopted in future legislation. The ownership transparency provisions of the End Anonymous Patents Act similarly seem likely to reappear in future legislation if that bill is not passed this year. Of course, with Congress’ slow pace at passing any legislation, the safest bet is always that none of these bills passes.

President Obama Steps into the Fray

In June, President Obama issued seven legislative recommendations and five executive orders to “protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”

Of the seven legislative recommendations, three coincide with the currently pending legislation regarding fee shifting, expanded CBM Review, and identification of the Real Party-in-Interest. The other four recommendations seek to curb NPE patent litigation by: (1) publicizing demand letters sent by patent owners; (2) staying judicial proceedings against consumers when an infringement suit is pending against a vendor, retailer, or manufacturer; (3) modifying the International Trade Commission’s (ITC) standard for granting injunctive relief to reflect the more stringent standard articulated in eBay Inc. v. MercExchange (N14); and (4) providing the ITC with more flexibility in hiring Administrative Law Judges.

The five executive actions aimed at limiting patent litigation abuses include: (1) initiating a PTO rulemaking process to promulgate rules requiring patent applicants and owners to regularly update ownership information; (2) training patent examiners to more closely scrutinize non-structural functional claims and demand claim drafting with more clarity; (3) having the PTO publish new educational materials to educate parties targeted by NPEs about patent law; (4) expanding White House outreach efforts “to develop new ideas and consensus around updates to patent policies and laws”; and (5) having the U.S. Intellectual Property Enforcement Coordinator review existing Customs and Border Protection and ITC procedures to ensure more transparent, effective, and efficient enforcement of exclusion orders.

The Judicial Branch and ITC Weigh In

In a June 4, 2013 New York Times op-ed, Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit suggested that judges should invoke section 285 of the Patent Act (N15) more frequently to shift the cost of litigation abuse to the NPE. Chief Judge Rader argued that rather than passing new laws, existing laws, if more vigorously enforced, could limit abusive patent litigation. Chief Judge Rader identified several tell-tale signs of abuse, including: (1) using the threat of litigation cost, rather than the merits of a claim to encourage settlement; (2) suing hundreds or thousands of users of a technology who know little about the patent, instead of the product manufacturer; and (3) suing numerous companies with a demand for quick settlement at a fraction of the cost of defense. District judges have sometimes been reluctant to enforce section 285, so this guidance from Chief Judge Rader may signal that section 285 should be more frequently and vigorously invoked. If courts and litigants heed Chief Judge Rader’s call to use existing laws to combat litigation excesses, other fee shifting provisions – including the sanctions under 28 U.S.C. § 1927 for “multipl[ying] the proceedings in any case unreasonably and vexatiously” and under Fed. R. Civ. P. 11(c) for filing frivolous claims – that some commentators have long advocated using in patent cases may now also be used more frequently.

On June 24, 2013, the ITC “launched a pilot program to test whether earlier rulings on certain dispositive issues in some section 337 investigations could limit unnecessary litigation, saving time and costs for all parties involved.” “One such issue could be the existence of a domestic industry. . . . whether an industry in the United States exists or is in the process of being established” and thus whether the ITC has authority to act on a complaint of patent infringement. If selected by the ITC for expedited treatment, the ALJ overseeing the investigation will be instructed to conduct expedited fact-finding on the threshold issue and issue an initial determination within 100 days of instituting the investigation. The fact that the ITC specifically called out domestic industry as an issue suitable for expedited consideration suggests that the Commission is targeting NPEs that have recently brought litigation to the ITC by using past licensing efforts to satisfy the domestic industry requirement.

Vermont Uses Consumer Protection Laws to Target NPEs

Although patents are governed by federal law, Vermont recently passed legislation in a creative attempt to combat NPEs that target Vermont businesses and residents. In May, Vermont amended its Consumer Protection Act to create a cause of action against parties asserting patent infringement in bad faith. (N16) Under the legislation, a party who receives a demand letter issued in bad faith may sue the party alleging infringement in Vermont Superior Court. Indicators of bad faith may include issuing demand letters without reference to a patent number, demanding payment of a license fee in an unreasonably short period of time, and knowing the infringement allegation is meritless. (N17)

This legislation was invoked for the first time in May 2013 against MPHJ Technology, a company that has sent hundreds of notice letters to businesses, big and small, around the nation alleging infringement of patents related scanning technology and seeking to enter into a license. Attorney General Bill Sorrell (D-VT) asserts that filing this type of lawsuit will help attract business to the state, claiming that “[t]his is not anti-patent . . . [t]his is anti-abuse of patent rights. We don’t want people preying on Vermont’s small business.” The lawsuit is currently pending, with MPHJ likely to challenge the lawsuit on constitutional preemption grounds. If Vermont succeeds, this lawsuit may trigger other states to take similar actions under state consumer protection laws.

*Brian Pandya is a Partner in the Intellectual Property and Litigation groups at Wiley Rein LLP in Washington, DC. Mr. Pandya’s practice focuses on patent litigation and counseling. Before joining Wiley Rein, Mr. Pandya clerked for Judge Leonard Davis on the U.S. District Court for the Eastern District of Texas. Ryan Corbett is an Associate at Wiley Rein. Mr. Corbett’s practice also focuses on patent litigation. The authors thank summer associate Claire Frezza for her assistance with this article. Any opinions expressed in this article do not necessarily reflect the views of the firm or its clients.